Hogan's Alley

Friday, April 28, 2006

Speaking Of Gasoline Prices, How Big Is Big Oil's Take?

Much of the current demagoguery on the topic of gas prices, especially from the left, focuses on the clearly extraordinary profits being reported by the oil companies. Clearly, they have been the beneficiary of enormous windfalls as prices at the pump have risen. None of them have yet signed on to a commitment to screw their stockholders and voluntarily forswear some profit. Of course if they did we could then expect less spending on the development of new oil sources or refining capacity.

So, the question is, given these "large" profit margins, how much of the price of a gallon of gas goes into the oil companies' profit ledgers? For the answer lets turn to the website of Sen. Harry Reid of Nevada, Democratic leader of the Senate. Clearly no friend of Big Oil.

Sen. Reid's website has a chart (scroll down for it) that breaks down the components that make up the cost of a gallon of gas. At the time the chart was created a gallon of gas in Nevada cost $1.68, so all figures need to be raised proportionately. At that time, the component called "Refiner Margin", which includes the oil company profits and refining costs, was $0.25. For the sake of argument, lets say that the price has now, or will soon, double to $3.36. If the "Refiner Margin" still stood at the same percentage of the total, it would now be $0.50.

Assuming, generously, that fully one half of this new figure, or $0.25, is oil profits and that politicians foolishly mandated that the companies forswear all profits, consumers at the pump would then still be paying $3.11. At a cost still above the magic $3.00 figure, consumer, and more to the point voter fury, would not abate in the slightest. And they could look forward to dramatic reductions in supplies with no reinvestment of profits and yet higher market prices.